Insolvency and inquisitiveness

As reported in Building earlier this year (4 February) the construction industry experienced the highest number of insolvencies of any UK industry in 2018. Last year saw 2,954 firms become insolvent, an increase of 12% on the previous year and more than in any year since 2013. It is well known that the construction industry is particularly prone to insolvencies and there has been a great deal written about why that is the case and what can be done about it. Of equal importance, perhaps, and particularly for those that find themselves involved with an insolvent company, is what happens once an insolvency practitioner has been appointed. There is a significant amount of statutory regulation around this area, much of it contained in the Insolvency Act 1986 (IA). One aspect of the IA that I would like to consider in a bit more detail here is section 236.

When a company is in insolvency, whether that be administration, administrative receivership, provisional liquidation or liquidation, the insolvency practitioner can apply to the Court for an Order under s236 of the IA requiring a person to provide information about the company or to attend an examination in Court. I am concerned here with the provision of information since an aspect of this was the subject of a recent decision of the Court in Wallace v Wallace [2019] EWHC 2503(Ch). I will come back to this decision shortly.

The reasons for seeking an Order under s236 include the following:

Allowing the insolvency practitioner to "discover the truth" of the company's circumstances

Putting the affairs of the insolvent company in order

Identifying and recovering assets

Discovering facts surrounding potential claims

Reconstituting the company's accounting or business records and

Obtaining information to enable contracts to be completed.

The issue that came before the court in Wallace v Wallace was whether, as the Court put it, s236 has "extraterritorial effect". In the circumstances of this particular case the question was whether a s236 Order could be made against someone resident in the Republic of Ireland.

This was not a construction case (in fact it concerned the insolvency of a meat wholesaler) but the principle explored in the case is obviously equally applicable to insolvent construction companies. Whilst we do not need to go into too much detail about the facts, an Order was being sought by the liquidator of the meat wholesale company for the production of extensive company records from the company's former bookkeeper who is now resident in the Republic of Ireland and who had refused to comply with written requests to produce the documentation. It seemed clear that this person was probably the only one who had sufficient records to enable the insolvency of the company to proceed properly.

The cases that consider whether a s236 Order can be made against somebody out of the jurisdiction are at odds with each other and present, as the Court said, "a somewhat fragmented picture". The Court reviewed the purpose of s236, which is to facilitate the functions of the insolvency practitioner, and concluded that the production of these documents would not be unduly onerous or impose an unreasonable or unnecessary burden on the person against whom the Order was sought. The Court also concluded that the ability to require production of documents and information under s236(3) was a standalone power which could be exercised against someone out of the jurisdiction. Accordingly, the Order as requested was granted.

Given the potential extent of the requests for information that can be made under a s236 Order, anyone applying for an Order must demonstrate that the request is reasonable, that the information is reasonably required for the purposes I have described above, that investigations have already been made to get as much documentation as possible from other sources and that it can be demonstrated that that documentation is not available elsewhere. Also, as noted in Wallace v Wallace, it has to be shown that the production of the information does not impose an unnecessary and unreasonable burden on the person from whom the information is being sought. I have come across examples of requests being made of third parties (often the other party to a contract entered into by an insolvent contractor or sub-contractor) to provide a wide array of documentation citing s236 in circumstances in which no Order has been sought and indeed without providing any evidence to show that enquiries have already been made elsewhere. This is obviously not a proper exercise of the s236 powers.

Consequently, if you receive a wide-ranging request for information referring to s236 but without any explanation or prior requests for information, consider whether this has been properly made. Section 236 Orders are undoubtedly helpful to insolvency practitioners but, as was the case in Wallace v Wallace, they should be used only after other avenues of enquiry have been exhausted.

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